For several decades China has seen incredible GDP growth and the US has seen jobs shipped to the rising super power. This has prompted serious talk of China overtaking the US as the largest economy and talk of retribution, via crackdowns on their currency manipulation, has been touted by every Presidential candidate during this period.

I have always believed that while China was an economic threat to the US in the short term, we had nothing to worry about in the long term as long as we stuck to Free Market Capitalism. The Knowledge Based Economy would force low tech, low pay manufacturing jobs to China but the US would maintain high tech, high pay manufacturing jobs and the all important Research and Development jobs in startups and incubators around the world. Eventually, as the US retooled for this new economy, there would be room for both countries to flourish in the world economy and the US would maintain their #1 economy.

But there are reports coming out of China now that their economic/political model may be crumbling under its own weight sooner than I had thought.

“China’s economy grew 7.4% in the third quarter compared to the previous year, the National Bureau of Statistics said Wednesday, marking a deceleration from an 7.6% growth rate in the prior quarter.”

“China’s economy has grown at an average of around 10% a year for the past three decades, allowing the country to rocket past international competition to become the world’s second largest economy. Along the way, China’s markets have opened to the rest of the world, trade has increased dramatically and many of China’s citizens have joined an emerging middle class.”

I’ll admit that while growth is slowing in China, it’s not panic time and the US and most of the other countries of the world would kill for GDP growth rates that China is seeing. This chart shows GDP growth of China compared to the US:

China and US GDP chart

If you are interested in diving deeper into China’s GDP numbers over the past 30 years, click on the links below:

China looks more impressive from across the Pacific than it does inside the country as this NPR article points out.

“I’m not as optimistic as many people in the Western world think about China,” says Xu Dingbo, associate dean of the China Europe International Business School in Beijing.”

“If you want to be the world leader, I think China is far from ready,” adds Wang Jianmao, his fellow business school professor.”

“Andy Xie, a Shanghai-based economist, is even more downbeat.”

“The efficiency is going down,” he says. “Corruption is widespread. So I think this is the crossroads for China.”

The days are over where China was thought of as the de facto choice for low cost manufacturing and now there is competition from other Asian countries. Furthermore, their infrastructure is showing signs of collapsing under the weight of super fast growth.

“The government has helped boost economic growth by spending a fortune on infrastructure. Much of it is needed, but sometimes money is poorly spent or siphoned off. Since 2011, eight bridges have collapsed around the country, according to China’s state-run media. Most analysts blame government corruption.”

The NPR story goes on to explain how a bridge, that had $8 million in government money allocated, has needed major repairs after only 2 years and it turns out that only about $3 million actually went to construction costs. This type of corruption is typical of Socialistic style economies and we should not be surprised by this. Remember the US’s “Shovel Ready Jobs” of the 2009 Stimulus?

It’s also getting difficult for private, small businesses to get loans.

“China’s state-owned banks often fund these projects. But if you are a small or midsized private business — the kind that produces most of the jobs in China — getting a bank loan is very tough.”

And the rate of return on state sponsored investments is terrible.

“But economist Xu says many state firms are woefully inefficient.”

“You see lots of nice buildings, highways, beautiful cities like Beijing and Shanghai,” says Xu, “but if you look at the real financial numbers of many Chinese companies, the picture is very bad. It’s horrible.”

“Xu says the largest 102 state-owned companies had an average return based on assets of about 3.5 percent.”

“For nearly half of the assets in China, the rate of return is less than depositing money in a bank,” he says. “That means we are wasting lots of resources in China now.”

This is not a description of an economic/political climate that is conducive to future economic growth. By now the Private sector should be booming (from all that government stimulus) but that isn’t happening and the growth from the Public sector is worse than letting the money sit in a bank and draw interest. Low GDP growth numbers are on the horizon.

Social Instability

This is the biggest reason I have never feared China in the long term – Eventually the people will revolt and Freedom, that innate characteristic that is present in all humans, will win out.

China provides us with a contemporary example of how futile it is to think that large governments can control their citizens’ feelings, desires and moods. This NPR story details how China has an official policy called ‘Stability Maintenance’ that seeks to maintain order and how this policy has created the exact opposite of its intentions.

“In China, government critics call it “the era of stability maintenance.” It’s their label for the government’s policy over the past decade of prizing internal stability above all else, no matter the cost.”

“Beijing this year is spending $111 billion on its domestic security budget, which covers the police, state security, militia, courts and jails. This is now higher than its publicly disclosed military expenditure.”

I suggest you read the whole article because it is a frightening account of what happens when an oppressive government tries to ‘keep the peace’ through actions that limits freedom. The tools employed by China are legion and involve wire taps, directives from state security agents, suppressing dissent (by paying people to not protest or rewarding citizens for ratting out other protesters), beating children and a media that reports lies.

This quote, at the end of the NPR story, says it all:

“And so the paradox: The more stability is “maintained,” the less stable the country becomes.”

This is true of peoples’ freedom and also the Free Market, the more a government tries to maintain stability by circumventing the natural process, the more instability is produced.